EXECUTIVE OFFICE OF THE PRESIDENT COUNCIL OF ECONOMIC ADVISERS pot

The report provides an overview of current economic impacts of health care in the United States and a forecast of where we are headed in the absence of reform; an analysis of inefficienc

E XECUTIVE O FFICE OF THE P RESIDENT

THE ECONOMIC CASE FOR HEALTH CARE REFORM

E XECUTIVE S UMMARY

The Council of Economic Advisers (CEA) has undertaken a comprehensive analysis of the economic impacts of health care reform The report provides an overview of current economic impacts of health care in the United States and a forecast of where we are headed in the absence

of reform; an analysis of inefficiencies and market failures in the current health care system; a discussion of the key components of health care reform; and an analysis of the economic effects

of slowing health care cost growth and expanding coverage

The findings in the report point to large economic impacts of genuine health care reform:

 We estimate that slowing the annual growth rate of health care costs by 1.5 percentage points would increase real gross domestic product (GDP), relative to the no-reform baseline, by over 2 percent in 2020 and nearly 8 percent in 2030

 For a typical family of four, this implies that income in 2020 would be approximately $2,600 higher than it would have been without reform (in 2009 dollars), and that in 2030 it would be almost $10,000 higher Under more conservative estimates of the reduction in the growth rate of health care costs, the income gains are smaller, but still substantial

 Slowing the growth rate of health care costs will prevent disastrous increases in the Federal budget deficit

 Slowing cost growth would lower the unemployment rate consistent with steady inflation by approximately one-quarter of a percentage point for a number of years The beneficial impact on employment in the short and medium run (relative to the no-reform baseline) is estimated to be approximately 500,000 each year that the effect is felt

 Expanding health insurance coverage to the uninsured would increase net economic being by roughly $100 billion a year, which is roughly two-thirds of a percent of GDP

well- Reform would likely increase labor supply, remove unnecessary barriers to job mobility, and help to “level the playing field” between large and small businesses

W HERE WE ARE AND WHERE WE ARE HEADED

Health care expenditures in the United States are currently about 18 percent of GDP, and this share is projected to rise sharply If health care costs continue to grow at historical rates, the share of GDP devoted to health care in the United States is projected to reach 34 percent by

2040 For households with employer-sponsored health insurance, this trend implies that a progressively smaller fraction of their total compensation will be in the form of take-home pay and a progressively larger fraction will take the form of employer-provided health insurance The rising share of health expenditures also has dire implications for government budgets Almost half of current health care spending is covered by Federal, state, and local governments

If health care costs continue to grow at historical rates, Medicare and Medicaid spending (both

Federal and state) will rise to nearly 15 percent of GDP in 2040 Of this increase, roughly quarter is estimated to be due to the aging of the population and other demographic effects, and three-quarters is due to rising health care costs

one-Perhaps the most visible sign of the need for health care reform is the 46 million Americans currently without health insurance CEA projections suggest that this number will rise to about

72 million in 2040 in the absence of reform A key factor driving this trend is the tendency of small firms not to provide coverage due to the rising cost of health care

I NEFFICIENCIES IN THE CURRENT SYSTEM AND KEY ELEMENTS OF SUCCESSFUL HEALTH CARE REFORM

While the American health care system has many virtues, it is also plagued by substantial inefficiencies and market failures Some of the strongest evidence of such inefficiencies comes from the tremendous variation across states in Medicare spending per enrollee, with no evidence

of corresponding variations in either medical needs or outcomes These large variations in spending suggest that up to 30 percent of health care costs (or about 5 percent of GDP) could be saved without compromising health outcomes Likewise, the differences in health care expenditures as a share of GDP across countries, without corresponding differences in outcomes, also suggest that health care expenditures in the United States could be lowered by about 5 percent of GDP by reducing inefficiency in the current system

The sources of inefficiency in the U.S health care system include payment systems that reward medical inputs rather than outcomes, high administrative costs, and inadequate focus on disease prevention Market imperfections in the health insurance market create incentives for socially inefficient levels of coverage For example, asymmetric information causes adverse selection in the insurance market, making it difficult for healthy people to receive actuarially reasonable rates

CEA’s findings on the state of the current system lead to a natural focus on two key components

of successful health care reform: (1) a genuine containment of the growth rate of health care costs, and (2) the expansion of insurance coverage Because slowing the growth rate of health care costs is a complex and difficult process, we describe it in general terms and give specific examples of the types of reforms that could help to accomplish the necessary outcomes

T HE ECONOMIC IMPACT OF SLOWING HEALTH CARE COST GROWTH

The central finding of this report is that genuine health care reform has substantial benefits CEA estimates that slowing the growth of health care costs would have the following key effects:

1 It would raise standards of living by improving efficiency Slowing the growth rate of

health care costs by increasing efficiency raises standards of living by freeing up resources that can be used to produce other desired goods and services The effects are roughly proportional to the degree of cost containment

2 It would prevent disastrous budgetary consequences and raise national saving Because

the Federal government pays for a large fraction of health care, lowering the growth rate of health care costs causes the budget deficit to be much lower than it otherwise would have been (assuming that the savings are dedicated to deficit reduction) The resulting rise in

national saving increases capital formation

Together, these effects suggest that properly measured GDP could be more than 2 percent higher in 2020 than it would have been without reform and almost 8 percent higher in

2030 The real income of the typical family of four could be $2,600 higher in 2020 than it otherwise would have been and $10,000 higher in 2030 And, the government budget deficit could be reduced by 3 percent of GDP relative to the no-reform baseline in 2030

3 It would lower unemployment and raise employment in the short and medium runs When

health care costs are rising more slowly, the economy can operate at a lower level of unemployment without triggering inflation Our estimates suggest that the unemployment rate may be lower by about one-quarter of a percentage point for an extended period of time

as a result of serious cost growth containment

T HE ECONOMIC IMPACT OF EXPANDING COVERAGE

The report identifies three important impacts of expanding health care coverage:

1 It would increase the economic well-being of the uninsured by substantially more than the costs of insuring them A comparison of the total benefits of coverage to the uninsured,

including such benefits as longer life expectancy and reduced financial risk, and the total costs of insuring them (including both the public and private costs), suggests net gains in economic well-being of about two-thirds of a percent of GDP per year

2 It would likely increase labor supply Increased insurance coverage and, hence, improved

health care, is likely to increase labor supply by reducing disability and absenteeism in the work place This increase in labor supply would tend to increase GDP and reduce the budget deficit

3 It would improve the functioning of the labor market Coverage expansion that eliminates

restrictions on pre-existing conditions improves the efficiency of labor markets by removing

an important limitation on job-switching Creating a well-functioning insurance market also prevents an inefficient allocation of labor away from small firms by leveling the playing field among firms of all sizes in competing for talented workers in the labor market

The CEA report makes clear that the total benefits of health care reform could be very large if the reform includes a substantial reduction in the growth rate of health care costs This level of reduction will require hard choices and the cooperation of policymakers, providers, insurers, and the public While there is no guarantee that the policy process will generate this degree of change, the benefits of achieving successful reform would be substantial to American households, businesses, and the economy as a whole

CONTENTS

INEFFICIENCIES IN THE CURRENT SYSTEM 9–17

THE ECONOMIC IMPACT OF SLOWING HEALTH CARE COST GROWTH 21–31

THE ECONOMIC IMPACT OF EXPANDING COVERAGE 31–38

REFERENCES 45-51

I I NTRODUCTION

The President has identified health care reform as a top priority His vision for reform is

to put us on a path toward a patient-centered health care system that preserves an individual’s choice of doctor and plan, and assures high quality, affordable care for every American Cost containment is a top priority Health care costs have risen rapidly over the last two decades and are projected to rise even more rapidly in the future Unless cost growth is slowed, the budget deficit will grow sharply and the rate of improvement in U.S living standards will slow significantly In addition, nearly 46 million Americans are currently without health insurance, and this number is projected to rise substantially Lack of coverage can lead to worse health outcomes, while at the same time raising costs for both the government and the privately insured

This study investigates the likely economic impact of health care reform that meets the President’s goals of substantial cost containment and coverage expansion At this point, the particulars of health care reform legislation are still being developed In consultation with the Administration and a wide variety of experts, the House and the Senate are evaluating options and formulating proposals As a result, our analysis must necessarily be viewed as illustrative of the possible benefits, rather than definitive But, it should help to show that the current health care system in the United States is on an unsustainable path, and that reforming the system could have large economic benefits

The analysis begins with a survey of the economics of the current and projected state of health care in the United States While there is much that is right with America’s health care system, particularly the rate of technological innovation, the rapid growth of this sector presents severe challenges to the American economy As health care spending rises as a share of GDP under the current system, both households and governments will feel pressure on their budgets Rising costs are also projected to cause continuing increases in the number of Americans without health insurance

The study looks at the extent and sources of inefficiency in the current system Comparisons with other countries suggest that Americans spend substantially more resources to achieve outcomes that are similar or less good than other developed countries Similarly, comparisons across states show large variations in spending without commensurate differences

in health Thus, there appear to be substantial inefficiencies in the current system The inefficiencies are the result of many well known problems in the American health care system, including flawed payment systems, high administrative costs, and too little emphasis on disease prevention

The report then discusses how successful reform could reduce inefficiency and expand coverage In particular, it describes a number of crucial “game changers” that could significantly slow the rate of health care spending growth and some of the measures likely to be involved in cost-effective coverage expansion

The final two sections of the study examine the economic impacts of successful health care reform The first examines the impact of slowing health care cost growth by improving efficiency in this key sector Using a growth accounting framework, we find that improved

efficiency raises living standards by freeing up economic resources from the health care sector that can be used to produce other goods and services people demand We also examine the impact of slower cost growth on the government budget deficit and private capital formation Finally, we examine the effect on short-run macroeconomic performance

The final section looks at the economic effects of health insurance coverage expansion Many of the benefits of increased access to coverage are inherently hard to measure But, others can be discussed in economic terms and quantified, at least roughly We consider, for example, the improved economic well-being of the newly insured relative to the costs of insuring them

We also look at the effects of greater access to coverage on the labor supply behavior of the newly insured Finally, we consider the impact of greater coverage, and innovations such as elimination of pre-existing condition restrictions, on labor mobility and the competitiveness of small businesses

We find that the sum of these economic benefits could be very large if reform genuinely brings about a substantial reduction in the growth rate of real health care costs and expands coverage Because such a substantial reduction will require hard choices and the cooperation of policymakers, providers, insurers, and the public, success is not guaranteed But, the economic benefits of achieving successful reform would be very large

II W HERE WE ARE AND WHERE WE ARE HEADED

An obvious place to begin the analysis is with a survey of the economics of the current and projected state of health care in the United States One key issue is the share of GDP devoted to health care This is a fundamental issue of resource allocation that affects the country

as a whole, households, employers, and government at all levels Another key economic issue concerns trends in insurance coverage

A Health Care Spending as a Share of GDP

Real per person spending on health care has been increasing rapidly, rising over 40

percent in the past decade alone As a result, as Figure 1 shows, the share of GDP devoted to health care almost doubled between 1980 and 2007.1 In 2009, health care expenditures are expected to be approximately 18 percent of GDP

Virtually all analysts agree that without major reform, health care’s share of GDP will continue to rise rapidly The projections in Figure 1 imply a health share of 28 percent in 2030 and 34 percent in 2040.2

1 U.S Department of Health and Human Services, National Health Expenditure Accounts

2 For the short run, the projections use the spending projections from the National Health Expenditure Accounts, generated by the Centers for Medicare and Medicaid Services (CMS) For the longer run (2019 and onward), they assume that excess cost growth rates for Medicare, Medicaid, and all other health care spending each continue at their historical averages

Source: CEA calculations.

Figure 1: National Health Expenditures as a Share of GDP, 1980-2040

Percent of GDP

Projected

B The Effect of Rising Health Care Costs on Households

Rising health care costs have major implications for household well-being For many workers, health insurance is obtained as part of their total compensation package along with wages and other fringe benefits, such as paid leave or a retirement plan As Figure 2 shows, roughly 59 percent of individuals younger than 65 years of age receive employer-sponsored health insurance

As health care costs have grown, so have employer-sponsored health insurance premiums For example, between 1996 and 2006, the average annual premium for family coverage obtained through an employer grew from $6,462 to $11,941 (in 2008 dollars), an 85 percent increase in real terms.3 These figures show the total amount paid for insurance through

an employer-sponsored plan, including both the part paid by the employer and the part paid by the employee If real premium growth continues at even 4 percent per year (which is less than the historical average of roughly 5.5 percent), premiums for family coverage will reach approximately $25,200 per year by 2025 and over $45,000 by 2040 (measured in 2008 dollars) Premiums for single coverage in 2006 were $4,321 (in 2008 dollars) They are projected to reach approximately $9,100 in 2025 and over $16,000 in 2040.4

3 U.S Department of Health and Human Services, Medical Expenditure Panel Survey-Insurance Component (1996) and U.S Department of Health and Human Services, Medical Expenditures Panel Survey-Insurance Component (2006)

4 Data on single coverage health insurance premiums come from the 1996 to 2006 Medical Expenditure Panel Survey-Insurance Component We then assume 4 percent annual real growth in future years, which is slightly lower than historical trends

Medicare 3%

Not insured 16%

Non-group health insurance

6%

Employer-sponsored health insurance 59%

Military Health Care 3%

Medicaid 13%

Source: U.S Census Bureau Income, Poverty, and Health Insurance Coverage in the United States: 2007.

Figure 2: Health Insurance Status of Non-Elderly Individuals in the United States, 2007

Based on theory and the best available empirical evidence, economists generally believe that over the long run, workers pay for the rising cost of health insurance through lower wages.5

To illustrate this relationship, the top line of Figure 3 shows historical and projected average annual total compensation (measured in 2008 dollars), which includes wages as well as non-wage benefits like health insurance The bottom line of Figure 3 shows annual total compensation net of health insurance premiums Since health insurance premiums are growing more rapidly than total compensation in percentage terms, an increasing share of total compensation that a worker receives goes to cover health insurance premiums In this calculation, our premium measure is a weighted average of projected premiums for single and family coverage The figure shows that compensation net of health insurance premiums is projected to eventually decline as premiums rise rapidly.6

5 Pauly (1998)

6 For this illustration, we construct a total compensation measure using data from the Bureau of Labor Statistics Payroll Employment Survey We use hourly compensation and annualize it by multiplying by 2,080 We project total compensation by assuming the same rate of historical average annual growth between 1996 and 2006 Data on health insurance premiums for single and family coverage come from the 1996 to 2006 Medical Expenditure Panel Survey-Insurance Component Our weights are proportional to enrollment by U.S private establishment workers in single coverage and family coverage plans in 2006 We then assume 4 percent annual real growth in future years, which is slightly lower than historical trends

Estimated average total compensation net of health insurance

Figure 3: Projected Annual Total Compensation and Compensation Net of Health Insurance Premiums

Source: CEA calculations.

Projected Real 2008 dollars

A different way in which households with employer-sponsored health insurance could be affected by rapid cost growth is by employers shifting to less generous plans In particular, Figure 4 shows that employers are shifting toward plans with higher annual deductibles, which require workers and their dependents to pay more out-of-pocket when they receive care Small employers appear to be shifting to less generous plans even more dramatically than large employers A continuation of this trend would mitigate the effect shown in Figure 3, because it would reduce the growth rate of employer-sponsored health insurance premiums But, workers would have to spend a larger fraction of their take-home pay on deductibles and co-payments

Firms with < 50 employees Firms with 50 or more employees

Figure 4: Average Employer-Sponsored Health Insurance Family Deductibles by Firm Size, 1999 and 2006

Source: Agency for Healthcare Research and Quality Medical Expenditure Panel Survey Insurance Component (MEPS IC): 1999 & 2006

Note: Estimates are conditioned on plans that have a deductible provision

Real 2008 dollars

C The Effect of High Health Care Costs on Government

The reason that rising health care costs have major implications for government budgets

is simple: almost half of health care is paid for by Federal, state, and local governments through Medicare, Medicaid, CHIP, and other programs.7 This fraction is expected to grow in the years ahead as the baby boom generation becomes eligible for Medicare, and as enrollment in Medicaid and CHIP increases.8

Figure 5 shows projected spending on Medicare and Medicaid as a share of GDP In the absence of reform, Medicare and Medicaid expenditures are projected to rise from the current 6 percent of GDP to 15 percent in 2040 As the figure shows, only about one-quarter of this rise is due to the projected demographic shifts in the population The remaining three-quarters is due to the fact that health care costs are projected to increase faster than GDP

Note: Total spending includes both Federal and state expenditures

Figure 5: Projections of Total Spending on Medicare and Medicaid as a Share of GDP, 2009-2040

Percent of GDP

Spending over time reflecting demographic shifts only

Spending over time reflecting demographic shifts and excess cost growth

This projected trend in Medicare and Medicaid spending obviously has implications for the government budget For a given path of revenue and non-health spending, the projected behavior of Medicare and Medicaid in the absence of reform implies an unsustainable rise in the Federal deficit Since state governments pay for a large fraction of health care for low-income populations, particularly through Medicaid, rising health care costs also have serious implications for state budgets And, because states must balance their budgets each year, the budgetary pressures are felt more quickly at the state level

7 U.S Department of Health and Human Services, National Health Expenditure Accounts, Projections 2008-2018

8 Many low-income individuals also become eligible for Medicaid upon reaching the age of 65 According to CMS data at http://msis.cms.hhs.gov/, the fraction of Medicaid spending in 2006 for recipients who were 65 or older was 24.2 percent Their corresponding share of all recipients was 10.2 percent Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (2008); Hadley et al (2008)

D Trends in Insurance Coverage

In 2007, 45.7 million Americans did not have health insurance.9 About one out of every six U.S residents under the age of 65 is currently without health insurance.10 Moreover, an even larger number of non-elderly individuals experience gaps in coverage over longer time periods For example, one study found that 31.8 percent (82 million individuals) were uninsured for at least one month during the 2004 and 2005 calendar years.11

As Figure 6 demonstrates, the fraction of Americans without insurance varies substantially across ages, with the highest rates among young adults and the lowest rates among the elderly, virtually all of whom are covered by Medicare

Source: U.S Census Bureau 2008 Annual Social and Economic (ASEC) Supplement

One reason for the large number of uninsured in the United States is high and increasing health care costs Individuals may become uninsured if out-of-pocket premium requirements are

no longer affordable They may also become uninsured if employers no longer offer health insurance as part of workers’ total compensation.12 Recent work suggests that rising health insurance costs (which are highly correlated with overall health care spending) can explain more than one-half of the declines in overall rates of health insurance coverage during the 1990s.13

9 DeNavas-Walt et al (2007)

10 Based on CEA tabulations of the U.S Census Bureau’s March 2008 Current Population Survey

11 Rhoades and Cohen (2007) See also Cutler and Gelber (2009)

12 See Chernew, Culter, and Keenan (2005) Cutler (2003) and Glied and Jack (2003) examine specifically declines

in private coverage rates rather than overall coverage

13 Chernew, Cutler, and Keenan (2005)

Workers in small firms are especially vulnerable In the United States, almost 96 percent

of firms with 50 or more employees offer health insurance as compared with 43 percent of firms that have fewer than 50 workers.14 Among small firms, the percentage offering health insurance peaked in 2001 and has been gradually declining since then.15 On average, small firms face much higher premiums relative to large firms for a given level of coverage generosity.16 This is primarily due to small firms facing higher administrative costs and insurers’ concern about potential adverse selection risks.17 Assuming that real growth in employer-sponsored insurance premiums does not slow from current rates, CEA projects that less than 20 percent of small employers will offer coverage by 2040.18

While the percentage of Americans with public insurance has been rising, it has not been sufficient to offset the decline in rates of private health insurance coverage.19 Using historical changes in the percentage of non-elderly uninsured individuals to predict future trends, Figure 7 shows that 22 percent of the non-elderly population (roughly 72 million Americans) will be uninsured by 2040.20

As the number of uninsured rises, there is a corresponding increase in uncompensated care costs, which include costs incurred by hospitals and physicians for the charity care they provide to the uninsured as well as bad debt (for example, unpaid bills).21 Both the Federal government and state governments use tax revenues to pay health care providers for a portion of these costs through Disproportionate Share Hospital (DSH) payments, grants to Community Health Centers, and other mechanisms.22 In 2008, total government spending to reimburse uncompensated care costs incurred by medical providers was approximately $42.9 billion.23 In the absence of reform to slow the real growth rate of health spending and a subsequent rise in the uninsured, we project that the real annual tax burden of uncompensated care for an average family of four will rise from $627 in 2008 to $1,652 (in 2008 dollars) by 2030.24

14 U.S Department of Health and Human Services, Medical Expenditure Panel Survey-Insurance Component (2006)

15 Kaiser Family Foundation (2008)

16 Gabel, McDevitt, and Gandolfo (2006)

17 Lee (2002); Simon (2005)

18 Projection was generated using the average annual change in small firm offer rates over the 2001 to 2006 period For additional discussion of small firms’ demand for health insurance, see Hadley and Reschovsky (2002) and Gruber and Lettau (2004)

19 Cutler and Gelber (2009)

20 The projection was generated using the historical average annual change in the percentage of the non-elderly population that is uninsured from 1999 to 2007, as reported by DeNavas-Walt et al (2007) Given the lags in data availability on national health insurance coverage, our estimates do not fully incorporate the effect of the economic downturn on employer-sponsored coverage and its impact on future coverage rates Moreover, the projection does not take into account other factors that may influence coverage rates, such as changes in public insurance eligibility

or local labor market conditions

21 American Hospital Association (2005)

22 Hadley et al (2008)

23 The precise amount of government spending used to finance uncompensated care is challenging to estimate since these resources may not be well targeted to providers who treat the uninsured See Hadley et al (2008) for more discussion

24 Current year per capita estimates were based on the ratio of total estimated uncompensated care costs paid for by the government to the estimated number of full-year uninsured We then assume that per capita spending would grow at 4 percent per year in real terms

III I NEFFICIENCIES IN THE CURRENT SYSTEM

To understand what could be accomplished with health care reform, it is crucial to identify the inefficiencies present in the current system This section details both the empirical evidence for such inefficiencies and the likely sources It also describes the market failures leading to low rates of insurance coverage The section then describes two key components of health care reform: genuine containment of the growth rate of health care costs and expansion of insurance coverage Because genuine cost containment will be difficult, we describe some of the critical changes likely to be necessary to achieve success

A Quantifying the Amount of Inefficiency Using Comparisons

It is well known that the American health care system has many virtues Over the past half century, American hospitals, physicians, pharmaceutical companies, and academic researchers have developed techniques and prescription drugs that permit the treatment of a host

of previously untreatable conditions.25 Nevertheless, two sets of comparisons strongly suggest that there are large inefficiencies in the American health care system

25 Cutler and McClellan (2001).

International comparisons The first set of comparisons is international We devote a

far larger share of our GDP to health care than other developed countries, but we do not achieve better health outcomes.26 Figure 8 shows the fraction of GDP devoted to health care in a number

of developed countries in 2006 According to the Organization for Economic Cooperation and Development (OECD), the United States spent 15.3 percent of its GDP on health care in 2006 The next highest country was Switzerland, with 11.3 percent In most other high-income countries, the share was less than 10 percent

Source: Organization for Economic Cooperation and Development, OECD Health Data, 2008 (Paris: OECD, 2008)

Note: For countries not reporting 2006 data, data from previous years is substituted.

Figure 8: International Comparison of Health Care Spending as a Share of GDP, 2006

Figures 9a and 9b show female and male life expectancy in the same group of countries The data show that life expectancy in the United States is lower than in any other high-income country—and many middle-income countries The same result holds if one looks at infant mortality: despite the high share of health care expenditures in the United States, our infant mortality rate is substantially above that of other developed countries Of course, many factors other than health care expenditures may affect life expectancy and infant mortality rates, including demographics, lifestyle behaviors, income inequality, non-health disparities, and measurement differences across countries.27 But, the fact that the United States lags behind lower spending countries is strongly suggestive of substantial inefficiency in our current system

26 Anderson and Frogner (2008).

27 Robert Wood Johnson Foundation (2009) For more information on how differences in measurement and norms affect cross-country comparisons, see Congressional Budget Office (1992)

66 68 70 72 74 76 78 80 82 84 86 Japan

Figure 9a: Female Life Expectancy at Birth, 2006

Source: Organization for Economic Cooperation and Development OECD Health Data, 2008 (Paris: OECD, 2008)

Note: For countries not reporting 2006 data, data from previous years is substituted.

66 68 70 72 74 76 78 80 82 84 86 Iceland

Figure 9b: Male Life Expectancy at Birth, 2006

Source: Organization for Economic Cooperation and Development, OECD Health Data, 2008 (Paris: OECD, 2008)

Note: For countries not reporting 2006 data, data from previous years is substituted.

As a crude indicator, one can use the difference in health care’s share of GDP between the United States and similar countries to gauge the magnitude of inefficiency Looking at the average for Canada, Germany, Japan, Sweden, Britain, and France, it appears that the amount of resources devoted to health care in the United States that may be due to inefficiency is roughly 5 percent of GDP (15.3 percent in the United States in 2006, versus 9.6 percent, the average for the six comparison countries, all of which have better health outcomes).28 Put another way, judging from the spending and outcomes in other countries, efficiency improvements in the U.S health care system potentially could free up resources equal to 5 percent of U.S GDP This is, however, only a rough measure It may well be that because of other differences between the various countries the true level is smaller But, this estimate is a useful guidepost.29

Further evidence that the high level of spending in the United States reflects inefficiency comes from the behavior of spending over time U.S health care spending has risen dramatically

in recent decades relative to spending in other countries, with no evident gains in relative outcomes In 1970, we devoted only a moderately higher fraction of our GDP to health care than other high-income countries As described above, today we spend dramatically more Yet, during that period, life expectancy has actually risen less in the United States than in other countries.30 Unless one believes that other influences on life expectancy have deteriorated dramatically in the United States relative to other countries, this suggests that much of the increased U.S spending is inefficient

State comparisons A second set of comparisons is within the United States Because

U.S states are more similar on most dimensions than independent countries, this comparison is even more compelling There is a large body of evidence, much of it assembled by researchers associated with the Dartmouth Atlas of Health Care, showing that utilization of specific procedures and per capita health care spending vary enormously by geographic region, and that

in many cases these variations are not associated with any substantial differences in health outcomes.31 Figure 10, for example, shows the wide variation in spending per Medicare enrollee across the United States Large variation remains even after adjusting for differences in the age, sex, and race of enrollees across states.32

Analyses suggest that areas with high rates of per capita spending have higher intensity of services in an inpatient setting, higher rates of minor procedures, and greater use of specialists and hospitals (“supply-sensitive services”) Factors such as differences in medical care prices, patient demographics, health status, and income levels cannot fully explain this variation.33

28 OECD (2008)

29 A recent report by McKinsey Global Institute (2008) concluded that the United States spends $630 billion more than expected on health care after adjusting for differences in wealth This is over 4 percent of GDP in 2008

30 Garber and Skinner (2008)

31 Wennberg, Fisher, and Skinner (2002)

32 Fisher, Bynum, and Skinner (2009)

33 Research suggests that there may be additional contributing factors, including workforce patterns and end-of-life care education See Baicker and Chandra (2004) and Fisher et al (2003) for additional discussion.

These large differences in spending suggest that nearly 30 percent of Medicare’s costs could be saved without adverse health consequences.34 If these patterns are consistent with the experience of other populations, such as Medicaid enrollees and the privately insured, then it should be possible to cut total health expenditures by about 30 percent without worsening outcomes Since we currently spend approximately 18 percent of our GDP on health care, a 30 percent reduction in expenditures would again suggest that savings on the order of 5 percent of GDP could be feasible

B Sources of Inefficiency in the Health Care Delivery System

The inefficiencies behind the empirical estimates have been widely reported Among the most frequently cited are:

 We spend a substantial amount on high cost, low-value treatments

 Patients obtain too little of certain types of care that are effective and of high value

 Patients frequently do not receive care in the most cost-effective setting

 There is extensive variation in the quality of care provided to patients

 There are many preventable medical errors that lead to worse outcomes and higher costs

 Our system is complex and we have high administrative costs

At a fundamental level, the inefficiencies stem from the fact that health care is very different from conventional goods and services The markets for health insurance and medical

34 Wennberg, Fisher, and Skinner (2002)

care are classic examples of markets in which asymmetric information is important—that is, where one party to a transaction is likely to have more information than another In health insurance markets, asymmetric information can lead to adverse selection, whereby individuals who know they are likely to have high health care costs are more likely to seek health insurance Information asymmetries also lead to moral hazard, where insurance coverage may insulate patients from cost consciousness and promote unnecessary care In considerable part because of these market failures, government programs and policies play a large role in health care This means that in many cases incentives are not determined by market forces

These departures from the conditions that would lead to efficient outcomes manifest themselves in seven main drivers of inefficiency in the U.S health care system

Provider incentives Most provider payment systems are fee-for-service, which creates

financial incentives for doctors and hospitals to focus on the volume of services that they deliver rather than the quality, cost, or efficiency of care delivery In general, payment systems do not reward higher quality and value In some cases, they reward poor quality of care by paying for the costs associated with additional medical care necessary to fix errors that could have been prevented.35 Providers also have strong financial incentives to compete on the basis of technology adoption rather than price, leading to an excess supply of high technology equipment and services (for example, MRI machines and minimally invasive vascular diagnostic and procedure suites) and accelerated replacement of hospital beds in local markets In turn, this can lead to higher rates of utilization and costs.36 Also, current payment systems generally do not reward providers for effectively managing patients with chronic illnesses or educating patients about preventing disease through lifestyle changes such as exercise, improved nutrition, and smoking cessation Finally, some academic research has suggested that some physicians practice

“defensive medicine,” that is, supply additional services that are of marginal or no medical value, including additional diagnostic tests and unnecessary referrals to specialists.37

Limited financial incentives for consumers While health insurance provides valuable

financial protection against high costs associated with medical treatment, current benefit designs often blunt consumer sensitivity with respect to prices, quality, and choice of care setting.38 There is well documented evidence that individuals respond to lower cost-sharing by using more care, as well as more expensive care, when they do not face the full price of their decisions at the point of utilization.39 Additionally, most insurance benefit designs do not include direct

35 Preventable re-admissions are an example According to Medicare Payment Advisory Commission (MEDPAC), about 18 percent of Medicare hospital admissions result in re-admissions within 30 days of discharge, which amounts to an extra $15 billion a year spent on re-admissions About $12 billion of this amount is spent on potentially preventable re-admissions (Hackbarth, 2009) A second example is payment for drug-related injuries In

a recent Institute of Medicine study, researchers estimated that medication errors injure at least 1.5 million people each year and generate at least $3.5 billion in health care spending (Institute of Medicine, 2006)

36 U.S General Accounting Office (2008)

37 Studdert et al (2005)

38 This source of inefficiency is driven in part by the tax treatment of health insurance, which over time has led to very generous health insurance products (e.g., low deductibles and coinsurance) being offered in the market, particularly in employer settings

39 The classic illustration of this relationship is from the RAND Health Insurance Experiment (Manning et al., 1987) Additional evidence can be found with respect to emergency room visits (Selby, Firemand, and Swain, 1996;

financial incentives to enrollees for choosing physicians, hospitals, and diagnostic testing facilities that are higher quality and lower cost

Pricing of medical treatment There are relatively few forces in health care markets that

lead to price reductions in the way that we observe price reductions in other sectors of the economy when new technologies are introduced and diffused Many administered pricing

systems, such as those used by Medicare and some private plans, are slow to adjust for

productivity improvement or decreasing marginal costs of production that come as new medical procedures are routinized and providers acquire experience One example of this is CT scan technology, whereby a procedure on an older 8- or 16-slice machine may be reimbursed at a similar rate as one on a newer 32- or 64-slice model Even though the newer machine is faster, which can lead to greater throughput and a lower average cost per scan, prices are not adequately updated to reflect this, leading to potential overpayment.40

Fragmentation Within the United States, patients receive care from a variety of

independent and often competing organizations Poor information flows across provider organizations and misaligned incentives can lead to higher utilization and costs, as well as poorer health outcomes.41 There is some evidence that vertically integrated provider systems (such as

Kaiser Permanente, Geisinger, and Mayo Health System) can better manage costs and coordinate high-value treatment plans with patients, resulting in higher quality of care.42 Fragmentation of the system also leads to higher administrative costs Because there is a lack of standardization around billing systems, forms, and benefit designs, additional personnel are needed in hospitals and physicians offices to handle administrative functions for different payers There is a wide range of estimates regarding just how much higher administrative costs are in the United States relative to other countries given our complex multiple-payer system For example, a report by the McKinsey Global Institute estimates that the excess administrative costs associated with the U.S multi-payer system are approximately $100 billion (in 2008 dollars) per year.43

Lack of information for providers Medical care has become increasingly specialized

and complicated, and patients do not always receive care that fully complies with current clinical guidelines.44 Often, it is exceedingly difficult for providers to keep up with the best available evidence regarding the clinical risks and potential health benefits of alternative treatments In the United States, there are few coordinated efforts to objectively quantify the benefits of new devices, drugs, and procedures for diagnosing and treating diseases relative to their predecessors This lack of information for providers is likely an important part of explaining the variation in treatment patterns, and may help to explain why the United States spends a great deal on procedures and treatments with little objective marginal value

Wharam et al., 2007); and the effect of tiered cost-sharing for pharmaceuticals (see Gibson, Ozminkowski, and Goetzel, 2005, for a review)

40 Competitive bidding systems would address some of these weaknesses, but have only been adopted in limited capacities by public insurance programs See Dowd, Feldman, and Christianson (1996) for additional discussion of competitive bidding and Cutler (2009) for discussion of productivity improvement in health care

41 Cebul et al (2008)

42 For example, see Feachem, Sekhri, and White (2002)

43 McKinsey Global Institute (2008)

44 A study by McGlynn et al (2003) found that only 54 percent of acute care and 56 percent of chronic care provided by physicians conformed to clinical recommendations in the medical literature

Lack of comprehensive performance measurement and feedback Performance

measurement provides a way for physicians to determine how well or poorly they are doing with respect to delivering recommended care, using resources, and patient outcomes.45 There is some evidence that when physicians receive data on their clinical performance, they change behavior

in ways that can improve outcomes.46 Currently, a large proportion of physicians do not get timely feedback on the quality of care they provide and their resource use relative to that of their peer group, making it difficult for them to know how they compare in order to modify their practice behavior.47

Lack of information for consumers During the past several years, there have been

important investments by government and private organizations to develop better information resources for consumers.48 However, large gaps still exist with respect to the availability of information on the effectiveness of alternative treatment options, preventive care recommendations, physician quality, and transaction prices for specific medical services Without this, consumers are not able to make informed decisions when they select providers and treatments—choices that may affect their out-of-pocket costs, the quality of care they receive, and their health outcomes For example, when a patient lacks information on the number of times a provider has performed a particular procedure, he or she may choose to go to a low-volume hospital for a complex procedure, even though there is very good evidence that this choice will put him or her at higher risk of complications and death.49

C Market Failures Leading to High Numbers of Uninsured

The preceding discussion focuses on the sources of unnecessarily high costs related to the delivery of medical care But, the large number of individuals and families without health insurance represents another major inefficiency of our health care system In a well-functioning market, individual choices lead to the desirable quantities of goods and services being purchased, and the fact that many individuals choose not to purchase some goods is not usually a cause for concern The market for health insurance, however, is not a well-functioning market There are several market failures—that is, factors that cause the costs and benefits that households face to differ from the true costs and benefits These market failures result in too few individuals and households having insurance

Asymmetric information and adverse selection The most important market failure

causing inefficiently low coverage is adverse selection An insurance company will not price

45 Institute of Medicine Report Brief (2005)

46 The New York State Cardiac Surgery Reporting System provides one such example Chassin (2002) reports some evidence that measurement and public reporting on cardiac surgeons’ performance led to improved patient outcomes

47 A Commonwealth Fund study by Audet, Doty, Shamasdin, and Schoenbaum (2005a) found only one-third of physicians had any comparative performance data available to them, with health plans being the most common

source See also, Audet, Doty, Shamasdin, and Schoenbaum (2005b)

48 Two examples of government information resources include Hospital Compare and Nursing Home Compare, which are found on the U.S Department of Health and Human Services, Center for Medicare and Medicaid Services website Other resources include the Leapfrog Group and HealthGrades

49 See for example, Birkmeyer et al (2002), Gaynor, Seider, and Vogt (2005), and Huckman and Pisano (2006)

individual health insurance at the average cost of covering the uninsured If it did, the individuals who purchased the policy would be disproportionately those who knew they were likely to have high health care costs, and so the company would lose money To address adverse selection risks, most insurers use medical underwriting and incorporate a risk premium into the actual price of coverage As a result, the price of health insurance that a typical person would face in the individual market greatly exceeds the average cost of covering him or her.50 Moreover, a significant proportion of individuals may be uninsured because they are denied coverage as a result of medical underwriting For example, a 2007 survey by America’s Health Insurance Plans found that in a sample of about 1.5 million individual applicants underwritten for coverage, among those between 50 and 64 years of age, approximately 22 percent of applicants were denied coverage based on medical underwriting.51

Liquidity constraints and uncompensated care Imperfections in credit markets reduce

the ability of households, especially low-income households, to obtain goods and services with immediate costs but long-term benefits Health insurance is a classic example of such a good Similarly, the uninsured obtain some free medical care through emergency rooms, free clinics, and hospitals, which reduces their incentives to obtain health insurance.52

Positive externalities When an uninsured person obtains health insurance and thus

better access to care, there are benefits to others For example, in the case of infectious diseases such as influenza or tuberculosis, appropriate diagnosis and care may prevent the spread of illness This is the classic definition of a positive externality—a benefit that accrues to someone other than the decision-maker This is another force that works in the direction of causing too few individuals and households to have health insurance

IV K EY ELEMENTS OF SUCCESSFUL HEALTH CARE REFORM

As discussed above, the key goals of health care reform are reducing the growth rate of costs, while maintaining choice of doctors and health plans, and assuring quality, affordable health care for all Americans At this point, the specifics of reform are far from settled In the analysis that follows, we therefore discuss relatively stylized versions of what successful reform could accomplish

A Slowing Cost Growth

On May 11, 2009, representatives from many facets of the health care system, including doctors, hospital administrators, health insurers, pharmaceutical firms, medical device manufacturers, and unions, met with the President and made clear their commitment to health care reform that lowers cost growth and covers all Americans These representatives pledged to

do their part to achieve the goal of reducing the annual growth rate of health care costs by 1.5

50 Similar adverse selection problems exist for the self-employed and small employer groups

51 America’s Health Insurance Plans (2007)

52 Herring (2005)

percentage points They agreed with the President that this goal is achievable only in the context

of comprehensive reform.53

This ambitious goal of slowing annual cost growth by 1.5 percentage points would genuinely “bend the curve” of rising health care expenditures In the analysis that follows, we take this degree of cost containment as one key case The health care representatives who signed the letter to the President pledged to do their part to rein in cost growth as soon as possible However, to be conservative, we assume that widespread cost containment will take time to spread throughout the health care system For this reason, we assume costs will follow their baseline trajectory until 2013 and then cost growth will be slower from 2014 onward To further err in the direction of conservatism, we also analyze more moderate degrees of cost growth containment In particular, we look at the implications of reducing annual health care cost growth by 1.0 and by 0.5 percentage points

Although cost growth containment of 1.5 percentage points per year may sound small, it would, in fact, be a tremendous accomplishment As we show in the next section, it would have dramatic implications for the share of GDP devoted to health care in 2040 Even with the support of crucial participants, achieving this level of cost containment will be challenging The inefficiencies in our health care system are large and complex, and they cannot be eliminated quickly or easily And, containing costs will require taking on groups that profit from the current system That is why health care reform is often described in terms of a need for game changers

We will not be able to fix the health care system through simple, one-time actions Instead, we need reforms that will alter the incentives of providers, patients, and other stakeholders in order

to change the direction in which the system is moving A change in direction can cumulate over time into far-reaching gains for our health care system

To give a sense of the difficulties involved, it is useful to describe some of the broad changes likely to be necessary to control cost growth In each case, we try to give specific examples of actions in the category Importantly, key stakeholders in the health care system

agree that these actions are needed

Reorienting the financial incentives of providers toward value rather than volume

Payment systems should be modified to encourage more appropriate use of resources by providers, particularly in the outpatient setting Systems should reward providers who deliver care that adheres to evidence-based guidelines and should not pay for preventable medical errors Examples may include bundling payments for certain types of outpatient care or procedures, using blended payments when there are multiple treatments that are mutually effective, and denying payments for certain health care associated infections and “never events.”54 Given the extensive variation in utilization and spending, other reforms might include directly targeting individual providers or geographic regions that are high-end outliers.55 Payment systems should

53 For the text of the letter, see:

http://www.whitehouse.gov/assets/documents/05-11-09_Health_Costs_Letter_to_the_President.pdf

54 Examples of health care associated infections and “never events” include foreign objects retained after surgery, air embolism, blood incompatibility, pressure ulcers (stages III and IV), burn and electric shock, catheter-associated urinary tract infection, and surgical site infection associated with certain surgeries

55 Here it would be very important to use risk-adjustment methods to control for differences in patient demographics, health status, and medical care prices that may affect utilization and spending

also create positive incentives for promoting disease prevention activities and helping patients manage chronic conditions effectively

Looking systematically at what works and what doesn’t in order to provide more value care and less care that is of low value For many types of medical conditions, a patient

high-may have a choice of several methods or treatments, each having different benefits or risks Systematic examinations of the merits of different treatments and dissemination of the results of those examinations to patients and providers is one mechanism for promoting high-value care Health information technology may play an important role in increasing the rate at which new information broadly diffuses to providers and is incorporated into practice behavior

Expanding performance measurement and provider feedback Performance

measurement includes collecting and summarizing information about clinical quality, consumer satisfaction, and resource use of provider practices Typically, hospitals and physicians face reporting requirements across the set of insurers with whom they contract One potential way to increase efficiency is to facilitate the development of a set of performance measures that all providers would adopt and report.56 Widespread adoption of health information technology can help in this process by increasing the rate at which data can be exchanged Additionally, new efforts could be made to generate risk-adjusted provider performance profiles to encourage

quality improvement and to inform consumer decision-making around quality

Reducing fragmentation When multiple, independent providers are used in the care of a

patient and information does not flow well between them, quality of the care can be poor and resources used can be greater than if care had been more closely coordinated Some have advocated strategies that promote reduced fragmentation and greater coordination through the use of financial incentives such as bundled payments for specific episodes of care Another type

of fragmentation is administrative The unique systems of payers lead to greater administrative costs for hospitals and physicians One proposed strategy would be to create a standardized electronic billing, benefit determination, preauthorization, and patient payment determination method that could be used by all providers and payers and lead to administrative simplification

Aggressively targeting fraud and abuse Anecdotal evidence suggests that there is

significant fraud and abuse in the Medicare and Medicaid programs, including the submission of bills for services not rendered, billing individually for services that should have been paid for as

a single payment, “upcoding”of services to receive a higher payment, submitting bills for covered services, and providing services that are not medically necessary.57 Modernizing data systems that enable real-time detection of fraudulent activities and increasing personnel to investigate suspicious activity are two types of proposals that would help the Federal government and states become more effective at identifying and eliminating these costly practices

non-Giving patients a greater role Engaging patients in medical decision-making can lead

both to better alignment of treatment strategies with patient preferences and to lower costs: well informed patients are more likely to be comfortable with less invasive, extensive, and expensive

56 Of course, different sets of measures could be specified for different patient populations

57 Becker, Kessler, and McClellan (2005)

treatment options.58 Another strategy involves creating financial incentives for patients needing complex surgeries to use high quality, lower total cost “centers of excellence.”59 It will also be important to encourage individuals through education and incentives to make healthier lifestyle choices, such as exercising and healthy eating This is important because healthier lifestyle choices have positive, direct benefits on lowering costs.60

Rewarding high-value technology creation that reduces morbidity, mortality, and total spending over the lifetime In most fields, technological progress is generally cost-reducing as

individuals discover more effective ways of accomplishing things that were already being done

In medicine, however, technological progress in recent decades has been almost exclusively increasing, without generating a commensurate increase in value Undoubtedly, provider incentives, which largely reward finding an expensive way of treating a previously untreated condition rather than finding a less costly alternative to an existing treatment, contribute to this trend

cost-B Coverage Expansion

Successful health care reform will also expand coverage In our analysis of the economic effects, we consider expansion that covers all of the uninsured If the expansion is not complete, its economic impacts would obviously be smaller

A number of developments will be needed to overcome the problems of adverse selection and other market failures in the provision of health insurance

Improving health insurance purchasing options for individuals and small employers

One proposed strategy for improving the functioning of the individual and small-group markets

is to create an insurance exchange An exchange could perform several functions, including coordinating health plan participation; negotiating premiums with insurers; creating and disseminating consumer information about benefit designs, premiums, and plan quality; facilitating enrollment; and coordinating risk adjustment to reduce insurers’ risk in the event of adverse selection within the exchange By adopting an exchange, it is possible to reduce the cost

to individuals and small employers that is associated with shopping for coverage and to generate greater efficiencies in the marketing and distribution of coverage, potentially leading to lower premiums and higher coverage rates.61

Ensuring that all individuals, regardless of health status, can purchase coverage

Changing the rating rules to include guaranteed issue, elimination of pre-existing condition exclusions, and modified community rating will ensure that people who would historically pay very high premiums or not be insurable are able to have access to more affordable coverage This change will provide greater security for individuals and families who fear losing their

58 O’Connor, Llewellyn-Thomas, and Flood (2004)

59 Lower total cost takes into account that patients treated at “centers of excellence” may have lower risk of complications and lower future costs associated with the episode of care

60 See Finkelstein, Fiebelkorn, and Wang (2003) for a discussion of the impact of obesity on health care spending

61 See Marquis et al (2006) and Abraham, DeLeire, and Royalty (2009) for discussion of the role of price and price barriers on the purchase of insurance by individuals and small firms

non-employer-sponsored health insurance if they become unemployed or change jobs

Improving the affordability of health insurance for lower-income individuals and families For a significant proportion of individuals and families, the annual cost of health

insurance would simply consume too large of a share of the family budget to render it affordable

To ensure that all individuals are able to reap the benefits of coverage, additional financial assistance may be made available to lower-income individuals and families

Though we describe them separately, it is important to note that there may be interactions between expanding access to coverage and slowing cost growth For example, wider access to primary care, with an emphasis on prevention, is likely to help restrain cost growth Likewise,

an insurance exchange that standardizes application forms and streamlines insurance purchase may slow the growth of administrative costs Thus, the distinction between cost growth containment and coverage expansion may be a somewhat arbitrary one

The preceding section describes some of the reforms that could help slow health care cost growth This section considers the possible economic impact of slower cost growth What would be the likely impacts on both longer-run standards of living and shorter-run macroeconomic performance? We find that if we make the hard choices necessary to restrain cost growth significantly, the economic benefits we can hope to achieve are potentially very large

A Improved Efficiency Raises Standards of Living

The first effect that we consider is the direct impact of improved efficiency in the health care system Restraining cost growth fundamentally implies that we gain efficiency in the health care system This means that we can achieve a given set of outcomes using fewer resources If

we do not slow the growth rate of health care spending, we will have to devote a larger and larger share of our labor force and capital stock to health care Efficiency improvements will free up some of those resources to produce other goods that we value, thereby directly raising our standards of living

Methodology To gauge the potential magnitude of the effects, we need to specify the

possible efficiency gains in health care As discussed above, we consider three scenarios: a slowdown in annual cost growth of 0.5, 1.0, and 1.5 percentage points In all three scenarios, the reductions in cost growth are assumed to begin in 2014 and continue through the end of the simulation in 2040 As stressed above, none of these scenarios is intended as an exact representation of what an actual reform program would do Rather, the purpose is to provide a general indication of the types of benefits that could come from reform that slows real health care cost growth and expands coverage Also, as stressed above, achieving any of these degrees

of cost growth containment will be challenging

Using these alternative scenarios for possible health care savings, we then consider the possible effects of these savings on living standards and economic growth To do this, we use a standard growth accounting framework This framework is described in detail in Appendix 1 In this subsection, we consider only the direct gains from the efficiency improvements in health care Suppose, for example, that the cumulative efficiency improvements have lowered health care costs by 5 percent in 2018 This means that we can obtain the same health care outcomes using 5 percent fewer economic resources than we would have needed without reform Since health care was projected to be 20 percent of the economy in 2018, this means that reform will have freed up 5 percent of 20 percent, or 1 percent, of our economic resources These resources can be used to produce other goods and services that we value Thus, GDP would be about 1 percent higher than it would have been in the absence of reform

One subtlety is that the national income accounts often measure the output of the health care system using inputs (doctors visits, for example) rather than outcomes (successful treatments, for example) As a result, obtaining the same outcomes using fewer inputs might

reduce measured GDP in the health care sector “True” or “properly measured” GDP in health

care (that is, the quantity of health care obtained) would be unchanged, however, leaving only the increases in other goods and services In this study, we focus on the theoretical construct of properly measured GDP because we are concerned with the effect of health care reform on real living standards, not with the imperfections of national income accounting

Effects on health expenditures Figure 11 shows the implications of the different

scenarios for the path of health care spending as a share of GDP.62 Under the assumption that health care costs continue to grow at historical rates, the share would rise by about 0.5 percentage points per year, from 18 percent in 2009 to 34 percent in 2040 In the first scenario (0.5 percentage point slowing in cost growth), the share of GDP in 2040 is 30 percent; in the second (1.0 percentage point slowing), it is 26 percent; and in the third (1.5 percentage point slowing), it is 23 percent

One way to assess the reasonableness of these figures is to return to the comparison of the United States with other high-income countries The share of the economy devoted to health care in those countries is generally between one-half and two-thirds that in the United States Thus, substantial savings should be possible At the same time, the United States is, and almost certainly will remain, the technological leader in health care, and Americans value high quality health care enormously Thus, bringing our health share down by over a third relative to its current path is likely to be very challenging This discussion suggests that the cost savings envisioned in the first scenario are almost certainly achievable, while those in the third are probably near the upper bound of what is feasible

62 The details of this calculation are given in Appendix 1 Health care expenditures are expressed as a percent of estimated GDP, where the estimate includes the impact of increased efficiency

Figure 11: Different Scenarios for Path of Health Care Expenditures

Health spending as a percent of GDP

Source: CEA calculations.

Effects on GDP Figure 12 shows the implied output gains from direct effects of the

efficiency improvements under the three scenarios The figure shows that with a 0.5 percentage point reduction in annual cost growth, GDP is about 2 percent higher in 2030 than without reform With a 1.0 percentage point reduction, the increase is 4 percent And, with a 1.5 percentage point reduction, it is 6 percent The increases are even larger in later years

Slowing cost growth by 1.0 p.p.

Slowing cost growth by 1.5 p.p.

Figure 12: Impact on GDP of Improved Efficiency in Health Care

Percent of GDP

Source: CEA calculations.